The L'Oréal Paris relaunched site.

PARIS — L’Oréal thinks it can keep outperforming the market.

This story first appeared in the August 30, 2013 issue of WWD.  Subscribe Today.

The world’s largest beauty company said Thursday that first-half profits rose 5.2 percent to 1.71 billion euros, or $2.25 billion at average exchange, with operating profits hitting an all-time high.

L’Oréal sees no signs of a slowdown either. Jean-Paul Agon, the firm’s chairman and chief executive officer, confirmed the targets L’Oréal had set for this year, reiterating it should outperform the market and achieve growth in sales and profitability. In July, during a conference call with financial analysts, he had said the worldwide beauty market has decelerated slightly, advancing by 3.5 to 4 percent.

Operating income at the French beauty giant in the six months ended June 30 increased 7.7 percent to 2.04 billion euros, or $2.68 billion. Operating profit was 17.4 percent of sales — a company record for a half.

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“Operating profit has reached a historically high level, with a good quality gross profit and an ongoing policy of sustained investments in research and innovation and in advertising and promotional growth drivers,” said Agon in a statement released after the French market’s closed Thursday.

The results were 2 percent ahead of consensus, driven by a 50 basis-point margin improvement, according to Céline Pannuti, an analyst at J.P. Morgan.

“L’Oréal delivered more strongly than hoped for in the areas that we think matter the most: Gross margin rose an impressive 70 [basis points], only partly offset by 20 [basis points] higher [selling, general and administrative expenses], while the drivers of future sales growth — R&D and A&P — were flat as a percentage of sales in aggregate (as expected),” said UBS analyst Eva Quiroga in a research note.

In the half, gross profit was 8.42 billion euros, or $11.06 billion, representing 71.7 percent of company sales. R&D expenses rose to 3.6 percent from 3.4 percent as a percentage of revenues, while A&P expenses were 30.2 percent of sales at constant currency exchange and group structure.

Quiroga added that, by branch, operating margins were better than hoped for at L’Oréal’s Cosmetics division, which was up 70 basis points, while those of The Body Shop — down 40 basis points — and the dermatology business, which declined 670 basis points, were “significantly softer than expected.”

As reported, L’Oréal’s first-half sales increased 4.7 percent to 11.74 billion euros, or $15.42 billion. They advanced 5.4 percent on a like-for-like basis. The company’s growth drivers include emerging markets, such as Latin America; the Africa and Middle East zone, and the Asia-Pacific region. L’Oréal earlier in August agreed to acquire China’s Magic Holdings International, a manufacturer of cosmetics facial masks.

“Net, we deem L’Oréal’s [first half] a high-quality one, driven by the strength of the Consumer (mass-priced) Products division more than offsetting a well-known weakness in the Professional Division, where L’Oréal keeps ‘doubling down’ despite the structural changes in the business,” said Consumer Edge Research analyst Javier Escalante in a note.

He continued: “The bigger picture is that L’Oréal is managing to grow like-for-like sales ahead of the market, while leveraging nonstrategic SG&A to expand margins — despite its overexposure to the slow-growing salons or professional channel.”

Consumer Edge Research changed its L’Oréal stock reaction to “positive” from “neutral.”

“In the face of strong operational delivery, we expect the stock to react positively,” said Pannuti.

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